Chainlink 2.0 - A game changer?

Introduction

In this report, we assess some recent numbers from Chainlink and the relationship between the network’s growth and the lack of value capture of its $LINK token. In addition, we present the new projects presented at SmartCon, which can be the solution to unlock the value of the token and make it a good investment.

What is Chainlink?

Chainlink is a platform that allows interaction between real-world data (off-chain) and blockchains (on-chain). It is a decentralized oracles network and serves as a middleware between smart contracts and external data sources, allowing those contracts to access off-chain data securely.

The actual use cases of the protocol range from applications in DeFi, NFT and games to solutions for companies to integrate their systems with various blockchains.

Use Cases – Chainlink

Source: Chainlink

How does it work?

Chainlink is a network of decentralized oracles (DON – Decentralized Oracle Network) that serves to validate information received from the off-chain world through a data reputation classification system. Oracles are the nodes (nodes) that connect this received data to the blockchain that, after being validated, are connected to smart contracts.

The validation system is simple, and the oracles are monitored through two primary metrics:

1. Availability: recording failures by an oracle to respond on time.
2. Accuracy: recording incorrect answers based on deviations from the responses of other oracles.

In addition, Chainlink has an oracle reputation system to evaluate the performance of each one over time. It is worth mentioning that if an oracle acts with bad behavior, he may suffer financial penalties.

The $LINK token

The $LINK token was created with two main features:

1. Payments: used as a form of payment to operators of nodes for oracle services;
2. Work: the token can be staked by operators as collateral so they can provide the services.

Chainlink was born in 2017 when 1,000,000,000 (1 billion) tokens were created, 35% of which were made available for the initial sale, which raised $32 million. As a result, the allocation was distributed as follows:

• 35% for investors on the initial sale;

• 35% reserved for Node Operators and ecosystem rewards to incentivize network participants;

• 30% to Chainlink’s parent company, SmartContract.com

Chainlink’s Initial Supply Distribution

Source: Messari

It is worth mentioning that the 35% earmarked for operator rewards has not yet been distributed, a warning point that should be closely monitored.

Data and Growth

Before discussing Chainlink’s latest revelations, we must look at what’s been built so far.

Regarding the services provided, Chainlink is currently in a privileged and dominant position in the oracle segment, with more than 45% market share, measured by TVS (Total Value Secured).

Total TVS - Oracles

Source: Defi Llama (10/09/2022)

The growth of TVS throughout 2021 was highly relevant, rising from approx. $6 billion to $57 billion, an increase of nearly 10x.

TVS Evolution in 2021 – Chainlink

Source: Defi LLama

The $LINK token, on the other hand, did not follow this movement. In 2021, its market capitalization went from $4.8bn to $9.65bn, an increase of “only” 101%.

Market Capitalization - $LINK - 2021

Source: CoinMarketCap

In 2022, with the onset of the crypto bear market, we had a relevant deterioration in these indicators. In the case of Chainlink’s TVS, the drop was almost 80%, from $56 billion to $11 billion. The token price consequently also suffered a lot, devaluing approximately 60%, from $19.60 to the current $7.00.

TVS Evolution- Chainlink - 2022

Source: Defi Llama

$LINK Price – 2022

Source: CoinMarketCap

After analyzing these numbers, it is worth noting the discrepancy between the evolution of the TVS and the price of the token, especially in 2021. This divergence can be explained by a few factors, such as:

1. Market saturation and deterioration of growth expectations;
2. Potential dilution of the current offer of $LINK, mainly related to the 35% of the supply not yet distributed;
3. The imbalance between supply x demand for the use of the token.

Next, we will address and debate some of these points by analyzing the changes and suggestions presented by Chainlink at SmartCon, its event held at the end of last month, to bring, mainly, more utility to the token.

Tokenomics 2.0

The event’s main highlight was the announcement of the new $LINK tokenomics. As previously mentioned, the token has suffered from selling pressure from market participants, even as Chainlink’s fundamentals have evolved. Therefore, the new tokenomics emerges as a plan to try to solve this problem and increase the usability of the token so that it can capture the value generated by the protocol. This will be done from three main points, listed below:

1. Superlinear Staking

The main point will be the new staking model (superlinear staking). With this model, the cost of an oracle network attack will be extremely high, improving security at the protocol level. Simplistically, it will work as follows: node operators will deposit a certain amount of $LINK tokens in staking to guarantee that their information will be truthful. If one of these operators provides incorrect information, he may lose all the amount deposited (slashing).

Another node may issue a warning even if most nodes provide inaccurate information (e.g., bribery). If this happens, a specific group of high-reputation nodes is triggered to validate the data. If the agent that issued the warning is wrong, it will be slashed. Otherwise, he will receive the deposited amount from all other agents who provided the incorrect information.

This mechanism implies that potentially bribed $LINK holders must have a staking amount more significant than the combined deposits of all oracle nodes to pull off a successful attack.

Superliner Staking – ChainLink

Source: Whitepaper v2 – Chainlink

Staking will be released in phases over time, providing more and more functionality to users, with the first version (v0.1) planned to be released in December this year. The rewards, in turn, will start with $LINK tokens via incentives and will evolve into the BUILD revenue and fee-sharing model, which we’ll cover next.

Staking Roadmap

Source: Chainlink

1. Build Program

This program seeks to accelerate the growth of projects under development and projects already established in the market by providing personalized access and subsidies to Chainlink’s services. In return, these projects will have commitments to use network fees and other incentives to Chainlink’s service providers. In addition, these projects will be able to use a portion of their native tokens to pay for them and, consequently, bring another new source of revenue to the protocol.

In this way, there will be a better economic alignment between these participants, benefiting the entire ecosystem in the long term.

BUILD - Chainlink

Source: Chainlink

1. SCALE Program

SCALE seeks to accelerate the growth of blockchains and layer2 by providing them with the necessary infrastructure, with special conditions, for their development while increasing the economic sustainability of the Chainlink network. In addition, it will allow these ecosystems to be able to access Chainlink’s services and be able to communicate with multiple blockchains.

To this end, the projects will commit to offsetting the operating costs of oracle networks to accelerate the growth of their ecosystem and support the long-term sustainability of Chainlink’s services.

SCALE – Chainlink

Source: Chainlink

Cross-Chain Interoperability Protocol (CCIP)

The CCIP protocol is also worth mentioning. It acts as a level zero layer (Layer 0), allowing different blockchains and dApps from other blockchains to communicate securely and transparently. With this, it will be possible to build secure applications that send information, transfer tokens, and interact in many different networks.

This way, the CCIP aligns with our thesis that interoperability solutions will gain more market space. Furthermore, it shows that Chainlink also has a similar vision and is seeking to develop in this aspect.

Other highlights

To finish off the relevant topics of SmartCon, we have to mention the announcement of the partnership between Chainlink and SWIFT, an international payment system using CCIP. CCIP will allow SWIFT messages to instruct on-chain token transfers, helping the SWIFT network become interoperable across all blockchain environments.

Risks

Despite all the points presented above, which we see as positive for the future of Chainlink, we must consider some relevant risks that could negatively impact the price of your $LINK token.

Among them, we highlight the following:

1. Delay in the updates presented;
2. Uncertainty about tokens that have not yet been “dumped” on the market;
3. Deterioration of the macro scenario and continuation of the “crypto winter.”

Conclusions

Considering the positives and risks presented, we are constructive with the future of Chainlink and its token. We see that the growth potential of the crypto market and its applications will generate a great demand for quality oracle services. Chainlink seems very well positioned to take advantage of this movement and remain the leading provider of this type of service.